ECB should rethink second tier of mandate: Villeroy

FILE PHOTO: Governor of the Bank of France Francois Villeroy de Galhau speaks during a news conference at the G7 finance ministers and central bank governors meeting in Chantilly, near Paris, France, July 18, 2019. REUTERS/Pascal Rossignol/File Photo

FRANKFURT (Reuters) - The European Central Bank should strengthen emphasis on its secondary mandate, covering financial stability and the bloc’s broader economic aims, French central bank chief Francois Villeroy de Galhau said on Wednesday.

The bank’s main objective is to target inflation but it also has a responsibility to support the economic policies of the European Union (EU) in a vague, imprecise clause that has been used to justify various calls for ECB action.

“Rethinking the second pillar, and tracking a broader set of variables, including assets of financial institutions and nominal GDP, could help the ECB to cross-check, and reconcile its secondary objectives – starting with financial stability – with its primary mandate of price stability,” Villeroy told a conference.

Having undershot its inflation target for most of the last decade, the ECB is accused of providing so much stimulus that it undermines financial stability while its abundant, cheap liquidity sows the seeds of a future financial crisis.

Weighing in on the debate on whether the ECB should emulate the U.S. Federal Reserve’s recently tweaked target, Villeroy said the ECB’s own aim was already similar enough.

“Our inflation objective, being symmetric and medium-term, - if credibly, I stress credibly, symmetric and medium-term – would probably achieve similar outcomes ex-post to flexible average inflation targeting,” Villeroy told a conference.

Reporting by Balazs Koranyi; Editing by Kevin Liffey and Andrew Cawthorne